1. PED=%change in QD of product/%change in P of the product
- responsiveness of quantity demanded to a certain change in price.
Range of values of PED
Extreme cases;
-Perfectly elastic demand: PED=0, a change in price will have no effect on QD (completely unresponsive to price change)
-Perfectly inelastic demand: PED=infinite, a change in price will make QD=0
For normal goods:
-Inelastic demand= 0<x<1, a change in price will have smaller proportional change in QD
Firm can benefit by increased revenue when charging higher price on an product which has inelastic demand.
-Elastic demand= 1<x<infinite, a change in price will have a great proportional change in QD
Firm can raise revenue significantly by lowering their price on a product with elastic demand.
-Unit elastic demand=1, a change in price will have the same proportional change in QD. Demand curve with unit elasticity is a rectangular hyperbole.
GRADIENT does not equal PED NONONO!
- PED falls as price falls. For example, low-priced products have a more inelastic demand than high-priced, cuz consumers less concerned when price of a inexpensive product rises than when a expensive product's price rises.
Factors affecting PED:
1. # of close subs- more closer subs more elastic.
2. Necessity or luxury?-necessity is inelastic, luxury is elastic
3. How widely product is defined?- more defined more elastic
4. Time period under consideration-PED more inelastic in short term. More time more elastic.
Govt takes into account the relative elasticity of the product it taxes as it might hinder its other aims such as of full employment.
2. XED=%change in QD of product X/% change in price of product Y
-measures how much the demand for a product changes when there is a change in price of another
Range of values of XED
1. If XED is positive then products are substitutes. Higher the value, the more close subs they are.
2. If XED is negative then products are complements. Higher the value, the closer the complement are.
3. If XED is 0 then products unrelated.
Firms making complementary products must be aware of the price they charge.
3. YED=% change in QD of product/% change in income of consumer, measure of how much demand changed when income changes.
Range of values of YED
1. If YED is negative, then product is an inferior good.
Income rises, people switch to superior goods, therefore demand decreases.
2. If YED is positive, then product is normal good.
0<x<1, then product income-inelastic. x>1, income elastic.
Necessity goods have low income elasticity. For example, bread demand won't increase with income. Superior goods have high income elasticity. For example, holidays or lambos.
Elasticities - a measure of responsiveness
Elasticity of demand
1. PED=%change in QD of product/%change in P of the product
- responsiveness of quantity demanded to a certain change in price.
Range of values of PED
Extreme cases;
-Perfectly elastic demand: PED=0, a change in price will have no effect on QD (completely unresponsive to price change)
-Perfectly inelastic demand: PED=infinite, a change in price will make QD=0
For normal goods:
-Inelastic demand= 0<x<1, a change in price will have smaller proportional change in QD
Firm can benefit by increased revenue when charging higher price on an product which has inelastic demand.
-Elastic demand= 1<x<infinite, a change in price will have a great proportional change in QD
Firm can raise revenue significantly by lowering their price on a product with elastic demand.
-Unit elastic demand=1, a change in price will have the same proportional change in QD. Demand curve with unit elasticity is a rectangular hyperbole.
GRADIENT does not equal PED NONONO!
- PED falls as price falls. For example, low-priced products have a more inelastic demand than high-priced, cuz consumers less concerned when price of a inexpensive product rises than when a expensive product's price rises.
Factors affecting PED:
1. # of close subs- more closer subs more elastic.
2. Necessity or luxury?-necessity is inelastic, luxury is elastic
3. How widely product is defined?- more defined more elastic
4. Time period under consideration-PED more inelastic in short term. More time more elastic.
Govt takes into account the relative elasticity of the product it taxes as it might hinder its other aims such as of full employment.
2. XED=%change in QD of product X/% change in price of product Y
-measures how much the demand for a product changes when there is a change in price of another
Range of values of XED
1. If XED is positive then products are substitutes. Higher the value, the more close subs they are.
2. If XED is negative then products are complements. Higher the value, the closer the complement are.
3. If XED is 0 then products unrelated.
Firms making complementary products must be aware of the price they charge.
3. YED=% change in QD of product/% change in income of consumer, measure of how much demand changed when income changes.
Range of values of YED
1. If YED is negative, then product is an inferior good.
Income rises, people switch to superior goods, therefore demand decreases.
2. If YED is positive, then product is normal good.
0<x<1, then product income-inelastic. x>1, income elastic.
Necessity goods have low income elasticity. For example, bread demand won't increase with income. Superior goods have high income elasticity. For example, holidays or lambos.
Elasticity of Supply